The emergence of financial technology and the digital banking age

Apr 14, 2022

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The last ten years has seen financial technology – more commonly referred to as fintech – significantly disrupt a number of elements of more traditional banking and financial services.

Most of us are already interfacing with fintech as part of our increasingly cashless daily lives. We’re paying for taxis without cash or bank cards; accessing bank accounts with the swipe of a finger; sending money to friends via PayPal; depositing cheques by taking photos of them with our phones, and even investing in bitcoin and cryptocurrency.

Across areas such as payment services, insurance, venture capital, wealth management, retail and lending, fintech companies have sparked the transformation of technological capabilities and paved the way for a new dimension of banking convenience.

And the business world is taking notice. Statistics demonstrating the scale and impact of fintech speak for themselves:

  • The global financial sector is expected to be worth $26.5 trillion in 2022, with a compound annual growth rate (CAGR) of 6%.
  • 82% of traditional organisations plan to increase collaboration with fintech businesses in the next three to five years, linked to concerns by 88% of financial institution incumbents that a part of their business will be lost to standalone fintech companies in the next five years.
  • In 2022, mobile transactions are projected to grow by 121%, comprising 88% of all banking transactions.
  • Approximately 24% of the global population are already familiar with blockchain technology, with blockchain and regtech two of the fastest-growing segments of the industry.
  • 96% of global consumers are aware of at least one fintech service or company.

Failure to embrace, and invest in, this digital financial future could mean that many banks, lenders and services might not have much of a future at all.

Fintech innovation: changing the game

In today’s fast-paced world, consumers expect seamless, real-time, efficient ways of handling their finances. It’s an expectation that matches with the ethos of the fintech industry: namely, to increase transparency, reduce costs, and make information more accessible. This has led to a rise in partnerships between traditional financial companies and banking services, and start-ups and technology companies, working collaboratively to make use of each other’s capabilities and means in order to meet these changing demands. Start-ups and legacy institutions alike are focusing on technologies that offer substantial long-term potential in order to remain competitive, turn a profit and, crucially, not get left behind.

Thanks to fintech start-ups and entrepreneurs – and the adoption of this new technology by traditional banks, lenders and financial organisations – many new banking and payment methods are readily finding mainstream acceptance across both developed and emerging economies. Early adopters and pioneers in the field include global household names, from Apple, Goldman Sachs and PwC, to JP Morgan, Amazon, PayPal and Samsung.

There are several spaces that the fintech ecosystem generally concerns itself with:

  • Digital payments: Electronic payments – such as Apple Pay, Google Pay, QR code payments, mobile wallets and contactless payments – are at the epicentre of the financial revolution. According to PwC, digital payment systems and money transfers are supporting the development of digital economies and driving innovation – functioning as a stable backbone for economies worldwide.
  • Neobanking: Neobanks are 100% digital banking experiences – such as the likes of Chime, Monzo or Starling. These organisations use apps and other online interfaces to serve customers as opposed to physical, bricks-and-mortar outlets.
  • Alternative financing and alternative lending: This encompasses financial channels, instruments and processes that exist outside of traditional financial institutions and banking systems such as capital markets and regulated banks. Alternative financing routes include crowdfunding, revenue-based financing, peer-to-peer consumer and business lending, and online lenders.
  • Digital investment: Digital investment platforms use automated business management and financial functions to allow individuals to save and invest money and increase their profitability – for example, via investment funds, stocks and shares.

Fintech and its digitalisation offers greater flexibility and innovation within business models. One of the most-critical benefits offered by the fintech sector is the ability to provide financial products, services and access at far greater speeds and with less strict requirements and lengthy applications.

Where next for fintech?

Now global fintech has secured a firm foothold, what developments are likely to follow?

There are a number of key predictions for the future of fintech, including: the rise of digital one-stop-shops solutions for consumers; embedded finance; ESG-focused fintech services; foreign exchange solutions for SMEs; a greater focus on targeting jurisdictions with underdeveloped financial services; and fintech companies rebranding themselves as data-focused organisations.

To take one example in more detail, embedded finance is on the rise. It focuses on the seamless integration of financial services into traditionally non-financial platforms. For customers, it presents the opportunity to access financial services in relation to what they are doing; common examples include ‘buy-now-pay-later’ initiatives, such as Klarna, as part of retail website payment options, or a parking app that includes an in-built payment solution. Embedded finance seeks to improve the customer experience – a key driver for the majority of fintech developments. Financial providers will need to continuously evolve their offerings to ensure that they remain competitive; artificial intelligence and machine learning, alongside technologies such as robo-advisors, are pivotal to this.

However, such evolution and advancement are not without issues: some experts claim that fintech could give rise to the next financial crisis if it isn’t more tightly regulated. Each new opportunity and change to an existing operating model brings with it a degree of risk. Greater consistency of technology standards, and greater regulatory coordination across industries, can help to ensure financial stability. Without such measures, both financial and non-financial risks will intensify; for example, cybersecurity issues and threats to data privacy.

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